Tag: fiat currencies

You can now use gold and silver as legal tender in Utah. Here’s how it works.

Three weeks ago, Utah quietly became the first state to recognize gold and silver as an alternative currency. Utah Governor Gary Herbert signed House Bill 157 along with 37 other bills on March 27, 2012. Here’s what HB 157 does:

First, you can’t expect to use your Canadian Maple Leafs or Chinese Pandas as legal tender. Utah’s bill identifies exactly what types of gold and silver the state will accept as legal tender, and that’s only “gold or silver coin that is issued by the United States.” Utah calls U.S.-issued gold and silver coins, “specie legal tender.”

Line 72 in the bill states “Specie legal tender is legal tender in the state.” That means gold and silver coins are exempt from sales and use taxes, and it allows for a tax credit when exchanging “one form of legal tender for another form of legal tender.”

Now, Utah gold and silver investors won’t have to pay capital gains taxes when they sell their gold and silver for paper money (even if they’ve made a substantial profit). Of course, investors will still owe the Federal government capital gains, but at least Utah’s holding out a small umbrella for gold and silver investors.

There are some tricky issues that crop up when paying in gold and silver. What happens, for instance, if you want to mail a Silver Eagle as payment for goods and the spot price of silver drops 5 percent while your coin is in the mail? If we extend the logic in the bill, that shouldn’t matter because the amount of gold or silver due at the time of the sale (as determined by using London spot prices) will stay the same. If silver drops shortly after you’ve made a purchase using the silver, the seller’s the one “taking a loss.”

The bill addresses this issue in the context of paying taxes. Should the state of Utah decide it wants to tax specie legal tender, it lays out how the process would work. Namely, the seller would need to note:

The purchase price in specie legal tender

The amount of tax due

The tax rate

The date of the transaction

The most recent London fixing price

It creates some extra paperwork for sellers, but I imagine the people who don’t trust paper money are just fine with that. Utah’s paving the way for other states to follow suit (specifically it looks like Missouri might be next). The real kicker would be if we could get the Federal government on board. But, if we somehow get to that point, I suspect Congress will have bigger fish to fry – things like riots and bread lines.

Silver’s up more than 40 percent since the start of 2011 and that has me wondering why have the media and financial analysts have gotten their silver price forecasts so wrong?

It’s easy to look back on the past and see investing ideas that should have been no-brainers. I suspect that will be case for investors sitting on the sidelines while silver prices continue to surge. The white metal rose more than 80 percent last year and is already up more than 40 percent since the start of 2011. It begs the question, though: why have the media and financial analysts gotten their silver price forecasts so wrong?

According to GuruFocus.com, silver “experts” came into the year with an average silver price forecast of $29.50 an ounce in 2011. It’s April, and silver prices are already approaching $46 an ounce. Something’s seriously out of whack, and here are a few ideas why silver price predictions have fallen woefully short of the mark:

Metals as the new reserve currency. The tight interrelationships in the global financial system exported the mortgage derivatives crisis around the world. When the U.S. economy tanked in 2008, so too did economies in Europe and Asia. That means bailouts haven’t been limited to the U.S, and the net effect is its not just the dollar that’s declining in value; it’s most of the world’s major currencies. That’s turned finite commodities like oil and precious metals like gold and silver into de facto reserve currencies. When there are questions about the stability of fiat money around the world, precious metals provide one of the few safe havens left. The media and silver analysts may have under-estimated the U.S.’s inflation exportation.

Bond backlash. Standard & Poor’s warning earlier this week that the U.S. government’s AAA debt rating could be lowered in the next two years came as a surprise to no one. What did come as a big surprise is the backlash from financial titans and foreign governments.

Just last week, the world’s largest bond investor Pimco completely exited its position in U.S. treasuries. It’s not just Americans who are becoming disillusioned by U.S. debt, either. China, in particular, has been vocal in the international media in its calls for stronger fiscal policies in the U.S. When no one wants to hold bonds, other asset classes – commodities and precious metals, in particular – are bound to rise. The extremely rapid pace of the rise points to growing uncertainties about how the U.S. government will respond to the mounting debt crisis.

Under-reporting inflation. If you listen to the official line, it seems like there’s not much to worry about when it comes to inflation. The U.S. Bureau of Labor Statistics is reporting that the Consumer Price Index is rising at a mere 2.7 percent a year. In reality, though, that number’s actually higher than 10 percent. Since the year 2000, the Bureau has stripped out energy and food prices from its model in an attempt to more accurately portray inflation (what they term “core CPI”). Shadowstats.com tracks CPI according to the old inflation calculation model, and per that “outdated” scale, we just broke into the double digits again. Heavyweight investors are well aware of that fact, and they’ve sought out gold and silver as a means to protect their assets.

A correction in the gold:silver ratio. With most of the emphasis on gold bullion over the past decade, it appears the pendulum is finally shifting toward silver. Many analysts had been calling for a correction in the gold:silver ratio in the face of rising industrial demand and a desire to invest in precious metals without shelling out for gold. Silver stands in as a great alternative.

According to GuruFocus.com, the gold:silver ratio has stood at a rough average of 13:1 over the past 1,000 years. Its only been in the past 100 years that the ratio has been heavily skewed. At one point in the 1990s, the gold:silver ratio approached 100:1. Today, it’s closer to 35:1, and Eric Sprott at Sprott Asset Management expects it to go as low as 16:1. It’s hard to blame analysts for expecting the ratio to change more gradually than it has over the past 18 months. The question now is, just how low will that ratio go? No one knows the answer, but if they did, their silver price forecasts would certainly be more accurate.

Here are five simple ways to bet against the dollar; from opening a savings account in a foreign currency to investing in precious metals or American Blue Chip stocks.

1) ETFs. Perhaps the easiest way to bet against the dollar is by investing in an inverse dollar ETF. The PowerShares US Dollar Index Bearish ETF (NYSE:UDN) is the best in class with a daily trading volume around 156,000 shares. UDN shorts futures contracts as it tries to track the Deutsche Bank Short US Dollar Index (USDX) Futures Index. A better option, though, might be shorting an ETF that’s long the dollar in the form of UDN’s sibling, the PowerShares DB US Dollar Index Bullish ETF (NYSE:UUP). UUP has a trading volume that’s 16 times higher than UDNs, and some sources argue shorting long ETFs is a better strategy than going long short ETFs.

2) Buy gold. Since the supply of gold is relatively stable, the precious metal’s price tends to behave independently of the actions at the Fed’s printing press. If the value of the dollar goes down, gold prices can stay the same, but it’ll still take more dollars to buy the same amount of gold. Throw increased investor demand for gold into the mix when inflationary fears are building in the economy, and you’ve got a recipe for surging gold prices.

3) Convert your dollars to yuan. The Chinese government has loosened the strings it has the yuan of late, finally allowing allowing Americans to open yuan savings accounts directly in the U.S. The Bank of China branches in New York and L.A. allow investors to save cash in the form of renminbi (deposit up to $20,000 a year). Kiplinger also recommends checking out EverBank, which offers savings accounts in 20 foreign currencies (provided you pay a 0.75 percent transaction fee when you buy and sell currencies). Accounts can be started with as little as $2,5000.

4) Invest in multinational Blue Chips. While companies like tractor-manufacturer Deere & Company (NYSE:DE), The Coca-Cola Company (NYSE:KO) and software company Oracle Corporation (NASDAQ:ORCL) are all headquartered in the U.S., they derive significant portions of their income overseas. In the case of Oracle, 70 percent of the company’s revenues come from business outside of the U.S. Not only does these investments give you exposure to emerging economies, they hedge your exposure to the dollar while paying a modest dividend.

5) Invest directly in foreign companies. In the tech realm, the Chinese market operates behind what’s been dubbed The Great Firewall. American tech companies can’t get in, and a lot of the country’s biggest tech companies aren’t yet trying to capture audiences outside the domestic market. That means growth in your investment is unmoored from the performance of the dollar. In tech, consider SINA Corporation (NASDAQ:SINA), the maker of a Twitter-like microblogging service called Weibo. China’s financial markets has a new player in wealth management company Noah Holdings Limited (NYSE:NOAH) and the Chinese advertising industry looks like it’s led by Focus Media Holding Limited (NASDAQ:FMCN). There are also numerous plays in China’s solar industry from JA Solar Holdings Co., Ltd. (NASDAQ:JASO) to Trina Solar Limited (NYSE:TSL) to name a few.

In an appearance before the Senate Banking Committee, Bernanke pointed to a flaw he sees in a gold-backed currency: namely, that there’s not enough gold in the world to go around.

Rumblings that the U.S. should return to a gold standard have started trickling into the media as the public grows wary of a ballooning budgetary deficit. In an appearance before the Senate Banking Committee earlier this week, Federal Reserve Chairman Ben Bernanke was asked directly about the possibility of the U.S. returning to a gold standard.

“It did deliver price stability over very long periods of time, but over shorter periods of time it caused wide swings in prices related to changes in demand or supply of gold. So I don’t think it’s a panacea,” Bernanke said.

The soft response to questioning from Sen. Jim DeMint (R., S.C.) – a long-time Bernanke detractor – leaves a tiny window of hope that a gold standard might be something the Fed’s actually considering. “It’s not a cure-all, but it could be helpful,” Bernanke seems to be saying.

It’s difficult to imagine Bernanke would endorse a gold standard. He’s long maintained that the Federal Reserve kept too tight of a grip on the money supply by raising interest rates during the Great Depression. Once the public began losing faith in the dollar, they were all too eager to trade greenbacks for gold, which further contracted the money supply and ultimately led to deflation.

Linking the dollar to a fixed amount of gold would constrict the Fed’s ability to prop up the money supply. Bernanke himself pointed to another flaw he sees in a gold-backed currency: namely, that there’s not enough gold in the world to go around.

“I don’t think that a full-fledged gold standard would be practical at this point,” Bernanke said.

He could be implying a watered-down gold standard of sorts is possible in the future, but I’m not convinced Bernanke believes that. Inflation is one of the few tools the Fed has to spur growth (or at least the perception of growth). Giving power up is always more difficult than accepting it, and – so long as the public retains faith in the dollar – it would serve little purpose.

Ultimately, the question of when to sell your gold comes down to whether or not you believe the existing fiat currencies can survive the looming inflation.

If you’re holding gold as an investment or a way to protect your capital from inflation, you still need an exit plan. Ultimately, the question of when to sell comes down to whether or not you believe the existing fiat currencies can survive the looming inflation – or perhaps even hyperinflation – that many analysts see on the horizon.

“It’s going to be when the currencies collapse, and it’s going to be when governments come up with a new currency order,” Puplava says.

“Maybe they’re going to monetize it. They’ll monetize gold. They’ll have to have some kind of gold backing because we know the fiat system is in its end game route right now. All fiat currencies are depreciating. And it may be that they come up with regional currencies.”

Puplava envisions an Asian Block, a European Block and a North American Block of currencies all backed by some sort of tangible asset.

“By the time you have a currency collapse,” he says, “people no longer trust the paper. So, if they’re going to come up with any kind of solution, they’re going to have to come up with a solution that’s going to give the currency … some kind of credibility, and I think it will probably be the re-monetization of gold. At that point, you’re going to have your exit strategy.”

I’m not entirely convinced that the Euro, the Dollar and the Yuan are doomed. It’s almost too difficult to fathom. But it’s clear that we’re in extraordinary times. Countries around the world are in a race to de-value their currencies as they try to lessen their debt burdens. If one of those countries defaults or spirals into hyperinflation, the problem could spread globally, and the implications might be worse than we’d like to admit.